Schweser said MPK is constant while Marginal Productivity is diminishing. I understand diminishing productivity but I don’t understand Constant MPK.
MPK = alpha * Y/K, why is it constant? If MPK is constant, then the curve Y = K^(alpha) * L^(1-alpha) should be a linear curve. But obviously, it isn’t.
MPK isn’t constant.
Perhaps what you’re misunderstanding is that in neoclassical growth theory the economy wants to operate at a level where MPK = r: the marginal productivity of capital equals the marginal cost of capital. This explains why, when technology improves and the economy moves from one production curve to higher production curve, there is an increase in capital per worker. At the existing capital per worker level, MPK > r, so we increase capital per worker and MPK decreases (diminishing marginal productivity) until we reach the point where MPK = r.
Thank you so much !!!
Can you clarify if I interpret correctly?
Emerging countries has a very high growth rate are because of the following factors,
They are keep importing technology so their production curve keep shifting upwards.
They have very low K/L ratio, hence very high MPK which are higher than r*. They can achieve higher growth by increasing K to decrease MPK until it reach r*
Besides, I would like to know why neoclassical steady growth equation “growth in TFP/(1 + alpha)” do not include the “r” ? I think that if “r” is lower, then the sustainable growth rate can be higher because a country can further increase Capital to decrease MPK until MPK reach “r”.?